Problem 1:

(i) Briefly explain the organization that you are working for or one that you are familiar with. Assume that this origination is trying to expand its operations through acquisitions or merger. Would you propose that the acquisition or merger target have

(1) A high or low equity value-to-earnings multiple; and

(2) A high or low equity value-to-book multiple?

Explain your recommendation.

(ii)

Loan covenants are conditions attached to loans that require the borrower to do something or stop it from doing something or restrict certain activities if certain conditions are met. Illustrate how some of the commonly used loan covenants help to protect the interest of lenders.

Problem 2:

ABC pte ltd had $3000,000 shares as at 1 January 2011.The net income for 2011 was $450,000.The share price at the end of the year was $4.08.

There are 10,000 share options outstanding at the end of the year with an exercise price of $4.10 per share.ABC is also funded by $80,000 of 6% convertible bonds. They can be converted to shares at 250 shares for each $1,000 bond. The corporate tax rate is 17%.There is no other dilutive securities outstanding at this time.

(a) Suppose ABC pte ltd wishes to expand their business. They can fund the expansion by issuing new share or bonds. Thus, it is important that they keep the diluted EPS as high as possible. Analyze the two options and suggest which would the managers choose? Describe why you think so.

(b) For each of the subsequent pairs of approaches to fund management, choose one approach that would be more interested in the diluted EPS of a company.

Explain the main dissimilarity between each approach and the reason for your choice.

(i) Active vs passive

(ii) Quantitative vs tarditional fundamental analysis.